DIGITAL MEDIA

Oh no, he’s back! Just when we thought he was permanently reformed, that pesky emperor has returned minus his clothes. For how else do you explain $US240m ($A274.9m) for 1.6% of a three-year-old, marginally profitable company that implies a value of some $US15bn which represents some 100 times revenue and a PE ratio of 500. Yes, we’re talking Microsoft’s investment in Facebook.

Analyst David Bank of RBC Capital Markets has calculated that if you consider those deal metrics on a per subscriber basis and apply them to MySpace, it would account for almost the entire market capitalisation of its parent News Limited. Loose change of $US2bn would be attributed to all of News’ global TV, movie and newspaper businesses. Doesn’t quite gel. Should Chicken Licken start running for home?

OK, everybody pause and take a deep breath. Let’s consider this deal a little further then step back and think a little more about conditions now compared with those heady days that preceded the dot.com crash of early 2000.

There is no doubt Facebook is an extraordinary phenomenon of our time, as is MySpace. Both these social networking sites have tens of millions of active users and are still expanding very rapidly; particularly the former which is still running at growth rate in unique visitors of well over 100% on an annual basis. These are real businesses. They work, they are large and still growing rapidly and what’s more, they earn real money and make a profit. That sentence alone is enough to distinguish both from probably the great majority of casualties of the great dot.com crash.

From Microsoft’s perspective, the Facebook investment cannot really be divorced from the advertising deal that the two businesses had already struck. This is not the stake of a small passive investor commensurate to the shareholding taken.

Furthermore, the quantum of investment is very modest by its standards so apparently under intense competition from others including Google, the strategic element was no doubt very high.

So let’s set that particular transaction aside for now and compare the overall environment today with that which spawned comets across the sky such as Pets.com and Webvan.com in the US, our very own Sausage Software, Spike Networks and Open Telecommunications and my personal favourite from the UK – interactive fashion site, Boo.com. Legend has it that breathless promoters of Boo.com would ring investors from some of Europe’s wealthiest families with a script along the lines of, “We’re doing another round. We need another 20 million overnight and your share is two, I’ll call you back in half an hour to know if you’re in”. Invariably, if amazingly looking back, the money appeared.

Why do otherwise sane and canny financial people get sucked in to such behaviour and could it happen again? While it would be foolhardy to suggest the dot.com crash could not be repeated, anyone who recalls late 1999 to early 2000 clearly would surely not recognise those characteristics in today’s market.

Many things are different; economies are far larger, the big media corporations are also far larger, the online digital economy is real and tangible, regulation is tighter in many areas (notably IPOs) and there is a reachable global market including the likes of China, India and most of Asia-Pacific, South America and Eastern Europe in a far more real way than was the case eight years ago. It is perhaps also worth remembering that the first wave of dot.com fever ultimately yielded some very large, enduring and successful corporations such as Amazon, Yahoo!, eBay and Google. Ultimately, the wave of technology change it engendered also brought about fundamental change in the value chains of entire industries such as recorded music.

Digital technology will continue to change the world we inhabit both for consumers and enterprises. And for the latter, the worst option of all is probably to do nothing. Much more of today’s emerging technology is focused at improving organisational efficiency as well as enhancing the overall customer experience than was previously the case. It is not about stag profits and get rich quick options plans.

Of course, there can be no guarantees that another digital bubble won’t burst all over us. However, the world is far more sophisticated, technology-centric and global than it was eight years ago, all of which lessen the risk of a repeat. As a personal observation, there is no tsunami of exotic, wonderful and totally fanciful three paragraph ‘business plans’ as there was in 1999. (Oh to have thought to paper the walls with them like 1929 stock certificates.)

Perhaps even more importantly, there doesn’t seem to be otherwise sane and well-run businesses looking to throw money at ‘dot.com anything’ as was undoubtedly the case in early 2000. Now that was irrational exuberance. Perhaps rather boringly, the need to apply the normal disciplines of assessing strategic fit, identifying market and customer need, securing competitive advantage, conducting rigorous financial analysis and high quality operational execution, haven’t changed. So while he may not be stalking the halls right now, if you do happen to spot the emperor in a state of disrobement again – do speak up.

Malcolm Alder is the partner for digital business at KPMG.

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